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The Wisdom of the Market is Your Guide to Transportation Rates

The more you understand about freight transportation markets, the more likely that your products will move at the best rate for the desired service level.

By Kevin Zweier | Jan 21, 2015

In the world of transportation, shippers often have a difficult time dealing with capitalism's invisible hand. Ever-changing transportation rates, variations among carriers' service levels, and a complex network of lanes can cloud visibility into true market rates for many shippers. What's the market rate for each transportation lane? What cost or service improvements could an enterprise expect by redesigning a transportation network? For many shippers, the answers to these questions are unclear.

The biggest deficiency for large shippers is operating without sufficient market-wide intelligence of actual transportation rates. This is a disadvantage because it prevents comprehensive understanding of the drivers that determine freight costs. Many shippers don't even know what those cost drivers are, and that inhibits cost-effective freight movement. The information "deck" is usually stacked against shippers, and carriers keep their "cards" close to the vest.

Shippers tend to have excellent perspectives on their own individual transportation rates, but the equally important macro market-level view is often elusive. To get a much broader view of the dynamic transportation environment as a whole, shippers can purchase transportation rate benchmark data, culled from an aggregation of millions of load transactions, comprising numerous geographic, financial and service combinations. For even deeper insights, benchmarks that are modeled in a predictive software platform allow shippers to assess the difference between transportation rates they are paying, on a lane-by-lane level against the overall market's rates for the same lanes. This level of detail, known as freight market intelligence, can be hard to find with a typical benchmarking tool.

Understanding the nature of freight transportation markets allows shippers to operate more effectively and ensure products are moving at the best rate for the desired service level. Access to model-based benchmarks gives supply chain and transportation managers information they need, in order to elevate their vantage points and strengthen negotiating power when going out to bid.

Speed to Insight

Predictive freight market intelligence provides a set of data that can be mined and manipulated to answer a slew of questions… quickly. The data is easily navigated and arranged so that information relevant to any inquiry is readily available. The key difference between typical benchmarking and freight market intelligence is that, while benchmarking aggregates rates by region, it is a look-up tool that is only as good as the exact matches it can find. Freight market intelligence models how market rates are determined, so rates on any lane can be accurately calculated.

Shippers with access to freight market intelligence can quickly determine transportation rates for any number of lanes, accounting for variables such as equipment type, movement type, load type and service level. Even when no specific rates have been collected on an origin-destination pair, model-based benchmarking tools are capable of predicting rates for any movement on any lane with more than 90% accuracy. The results are also immediate, eliminating the time-intensive process of inquiring with individual carriers, or "dialing for diesels."

Holistic Network Design Intelligence

Designing new networks or redesigning existing ones are tremendous endeavors that require large amounts of information to analyze risk, service and cost. Both of these processes need to evaluate the costs of many new transportation lanes and validate the costs of the old ones. To understand the impacts of altering a network, it is crucial to know an appropriate market rate for all the candidate locations and lanes being evaluated. Depending on the robustness of the network, new lanes can number in the thousands.

Suppose a fruit supplier wanted to submit a bid as a supplier to a grocer it had never worked with before. Each required shipping lane is new, but the supplier needs to understand what the transportation costs would look like to prepare an accurate bid. Benchmark data can provide an overall estimate of the necessary transportation rates, provided they were known to the aggregator. Freight market intelligence allows a deeper look into actual rates that consider specific costs like refrigerated transport and whether the loads are live or drop. Using this information, the supplier could prepare an accurate bid on any lane for any type of transport that is required.

True Cost Driver Identification

Because freight market intelligence relies on an understanding of cost drivers to predict transportation rates, shippers gain insight into what factors create market rates and how to best leverage them. Some of the key market rate drivers are:

Single driver vs. team driver

Mode (flatbed, intermodal, refrigeration)

Equipment type

Movement type (inbound, outbound)

Load type (live load, drop load).

Understanding these drivers provides a basis for altering transportation behavior to achieve optimized efficiency. Is the increased cost of using team drivers instead of single drivers worth the reduced transit time? Is there a cost benefit to using intermodal and will the cost differential outweigh any additional safety stock needed due to slower transit? Freight market intelligence makes it easy for shippers to analyze this information and determine the best transportation solutions.

Is It Me or the Market?

When each cost driver is understood and modeled, a shipper can gain confidence in their assessment of their performance relative to the market. Using this information, shippers are empowered to investigate rates and timeframes that seem irregular in their existing networks and identify whether those rates are actual outliers or in line with the market.

It is also important to understand market rate information for accessorials, like stop and detention charges. Shippers need to look at their transportation costs in a holistic fashion and compare it to peers and between carriers to get the total picture. Accessorial benchmarks show where charges should be updated to be competitive with the market. It's knowledge, and that knowledge is power.

Shippers that use freight market intelligence level the playing field by extracting useful information from a large data set they would not otherwise have access to. This gives them the ability to take complete control of their networks and make decisions that bolster business, reliability and margins. Agreeing to transportation rates without consulting a freight market intelligence tool is akin to paying sticker price for a new car or buying a house without running comps; there's no way to know if you overpaid.

Kevin Zweier is vice president of the transportation practice at supply chain consulting firm Chainalytics (www.chainalytics.com).